L10_IRR - Financial Management Fall 2010 Lecture 10...

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Unformatted text preview: Financial Management Fall 2010 Lecture 10: Investment Criteria (II) Professor Erica Li Ross School of Business Roadmap Internal rate of return (IRR) Difference between NPV and IRR Understand the circumstances under which the IRR rule disagrees with the NPV rule Understand how to calculate the cross-over rate Textbook reading: Chapter 9 (ignore MIRR) Internal Rate of Return (IRR) IRR is the discount rate that makes NPV=0 9-3 0 = C + C t (1+IRR) t t = 1 T ∑ Example What is the IRR of this project? There is no direct formula for the IRR. To find the IRR, use your calculator = − 165 , 000 + 63 , 120 1 + IRR + 70 , 800 1 + IRR ( ) 2 + 91 , 080 1 + IRR ( ) 3 Financial calculator [2ND][CF] start the cash flow chart [165000][+/-][ENTER][ ] CF0, the initial investment, negative sign [63120][ENTER] [ ] C01 [1][ENTER][ ] F01 the frequency: the number of times it occurs (or just simply do [ ]) [70800][ENTER] [ ] [ ] C02 and F02 [91080][ENTER] [ ] [ ] C03 and F03 [NPV][12][ENTER] [ ] [CPT] NPV with required return 12% [ ] skip NFV [ ][CPT] Payback period [ ][CPT] Discounted payback period [IRR][CPT] IRR =16.13% Downward-sloping NPV profile Does the project have positive NPV if the required return is 12%? What if the required return is 20%?...
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This note was uploaded on 12/12/2010 for the course FIN 300 taught by Professor Mishra during the Fall '08 term at University of Michigan.

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L10_IRR - Financial Management Fall 2010 Lecture 10...

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